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By Robert Rapier on Feb 27, 2013 with 9 responses

How Oil Can Improve Our Long Term Energy Situation

Energy Security Trust

Energy policy is a major topic of discussion during almost every State of the Union address. The most recent address was no exception, with President Obama devoting a substantial portion of his speech toward reviewing recent energy accomplishments, and then promoting new energy initiatives.

(Related: Are President Obama’s Policies Causing U.S. Oil Production to Rise?)

One of those initiatives was one of the three major energy policy recommendations that I promoted in my book Power Plays. Here was President Obama’s version during the State of the Union address:

I propose we use some of our oil and gas revenues to fund an Energy Security Trust that will drive new research and technology to shift our cars and trucks off oil for good. If a nonpartisan coalition of CEOs and retired generals and admirals can get behind this idea, then so can we. Let’s take their advice and free our families and businesses from the painful spikes in gas prices we’ve put up with for far too long. I’m also issuing a new goal for America: Let’s cut in half the energy wasted by our homes and businesses over the next 20 years.

In my book, I made three policy recommendations that I believe would not only enhance the long-term energy security of any country, but are also capable of receiving broad political support. The recommendations address the demand side, the supply side, and they minimize the risks if supply and demand projections are grossly in error. The three policy recommendations are:

  1. Shift some income taxes to fossil fuel taxes in a revenue neutral manner
  2. Use the proceeds of oil to reduce dependence upon oil
  3. Support the Open Fuel Standard

The second proposal above is the one that the President endorsed during the State of the Union address. As I explained in my book, I am concerned about the impact of continued reliance on fossil fuels. But I have no doubt that we will still need stable oil supplies for a number of years as we transition away from oil. The proposal is designed to meet those petroleum needs during this transition phase, while using some of the proceeds to hasten the transition. In short, my proposal was that governments encourage domestic drilling — to meet our energy needs in the short-term — while using the royalties and tax revenues to fund programs that reduce dependence on oil.

Environmentalists vs. Drill, Baby, Drill!

But environmentalists are generally opposed to opening up areas to additional drilling. They think there simply isn’t a need to do so, and that it will just delay a transition to alternatives. They see oil companies and not ordinary citizens as the primary beneficiaries of oil drilling.

Many environmentalists believe that if they can prevent further development of oil reserves, then alternative energy, public transit, and conservation will necessarily rise to the challenge and alleviate the dependence on diminishing fossil fuel reserves. But the risk in this approach is whether the alternatives can be delivered when they are needed, and whether they can cover severe shortfalls. What if they can’t? What is Plan B? Shortages? Rationing?

On the other side are people who believe that underneath U.S. territory lies an ocean of oil, waiting to be tapped — if environmentalists would only get out of the way. They believe that energy independence is within our grasp if we aggressively develop our natural resources. But this notion suffers from a very similar risk as the position of environmentalists: What if the oil that is available simply can’t cover any severe shortfalls? What if the expectations that these vast oceans of oil exist lead us to delay actions on alternatives? Again, what is Plan B? Military action? A continued transfer of wealth to OPEC?

(Related: The Amazing Reversal of the US Oil Industry)

The majority of us fall somewhere in between these two positions; we want to see some domestic development as well as development of alternatives. This proposal would enable one to fund the other, while giving both environmentalists and drilling advocates something they want. But each side would need to compromise a bit.

Something We Can All Agree On

Both opponents and proponents of drilling would likely agree that our dependence on petroleum—and, specifically, imported petroleum—comes with risks.

Among the arguments from both sides are that this dependence puts our national security at risk and that it poses risks to the environment. I think both sides would agree that a long-term solution to petroleum dependence could be a combination of conservation along with alternative options such as higher-efficiency vehicles, electric transport, and public transit.

Where large numbers will start to disagree is whether this is achievable in the short term, or whether it is going to take a few more technological developments and more than a decade to see most of our petroleum dependence displaced.

(Related: Global Peak Oil Production — Where to Invest and Profit)

I fall into the latter category, for a variety of reasons. I am familiar with most of the alternatives, and they are simply not competitive even at gasoline prices of $4 or $5/gallon—nor are they scalable. To illustrate that point, consider Europe, where gasoline prices in many locations are double the price in the U.S. Even at these prices, petroleum remains the dominant choice for transportation in Europe (albeit at lower levels of consumption than in the U.S.). But it is going to take more than price, — or, at a minimum, much higher prices than Americans probably anticipate — to move us away from a high level of dependence on petroleum.

Conclusion: Using Oil to Get Off of Oil

So I propose a compromise where we open up some of the more promising areas to exploration, and then earmark some or all of the royalties to funding fossil fuel alternatives. Leases on federal lands should also be structured so that governments share in any windfall if oil prices skyrocket. One of the problems with windfall profits taxes is that they discourage investment in projects with marginal economics. But oil companies don’t plan projects with an expectation of $200/barrel oil. A lease that is structured to give governments an increasing portion of revenues at much higher oil prices will be unlikely to impact project economics for an oil company because the possibility of such high prices will be heavily discounted.

With the revenues, we could fund expansion of public transportation. We could provide a tax credit of $1,000 for each person who purchases a car that gets over 45 mpg. We could use these oil revenues to fund wind and solar power, freeing up natural gas that could then be used to displace petroleum in compressed natural gas (CNG) vehicles.

This should be a compromise with attractive elements for both sides. If we don’t agree to such a compromise, then what’s going to happen is that as prices continue to rise, so will the pressure to drill, and governments will eventually cave in to this pressure. But by failing to earmark the money for alternatives, it will just postpone the inevitable day of reckoning for oil supplies.

So, I endorse this suggestion from the President, as long as it is structured in the right way. It can’t be simply a new tax on oil companies that funnels money into alternatives, because that approach will have unintended consequences. By structuring it in the way I have suggested here, it has a good chance of 1). Gaining broad political support, and 2). Achieving the desired goals.

Link to Original Article: How Oil Can Improve Our Long Term Energy Situation

By Robert Rapier

  1. By JonSanders on February 27, 2013 at 8:47 am

    “Shift some income taxes to fossil fuel taxes in a revenue neutral manner.”

    Being retired, I’ve paid most of the income tax I’m going to pay in this life. A new tax on energy – or anything – hits me full force.

    You are hardly alone in proposing a shift away from income taxes. Politicians have realized that Boomers are going to stop paying income taxes as they retire. The cash cow is going to stop yielding cash. The way to get cash from an ex cash cow is to turn it into hamburger.

    • By Robert Rapier on February 27, 2013 at 6:00 pm

      Being retired, I’ve paid most of the income tax I’m going to pay in this life. A new tax on energy – or anything – hits me full force.

      No, that’s not how it would work. When I say “revenue neutral” I mean structuring it in a way to be revenue neutral. One way to do it would be tax credits like the Earned Income Tax Credit, where you can get a refund even if you owe taxes.

      This is often the objection: But it would surely raise my taxes. No, it doesn’t have to be that way. I could structure it so that it wouldn’t.

      • By Ed_Reid on February 27, 2013 at 7:42 pm

        I have the same level of belief in the potential of a “revenue neutral” tax as I do in Santa Claus, the Easter Bunny, the Tooth Fairy and even the Great Pumpkin. Our current fe(de)ral government could screw-up a rock.

      • By EngineerPoet on March 5, 2013 at 11:06 pm

        If we did this right, it could even save money.  US natural gas is far cheaper per BTU than crude oil (at least wholesale; East coast markets at the end of long narrow pipelines during winter are another matter).  Substituting natural gas for petroleum motor fuel would cut costs to the US consumer.

        What we really need is to bring NG prices up to profitability for drillers, but not much farther.  Adding vehicle demand will do this.  Adding “renewable” electricity (which is 70-80% NG-fired gas turbines) just lets the gas industry get into the position petroleum enjoys now.  If you want commodity electricity at a stable price, nuclear is the way to go.  Use nuclear to get NG and coal out of the base-load electric generation market, then use the NG in lieu of petroleum.  Reforming the NRC is an essential step; holding up Vogtle plant construction because of two different versions of a rebar specification in concrete is ridiculous, and ought to have the regulations thrown out.  We haven’t had a single nuclear plant problem due to following a newer version of a spec than the one approved, and we should not stop anything as a consquence.

  2. By ben on February 27, 2013 at 1:23 pm

    Compromise? Perish the thought that we might see that practiced in Washington!

    Recent experiences with the Fiscal Cliff and current machinations over pending sequestration are but further evidence of the problems with contemporary politics; an arena where oneupmanship and the game of gotcha has replaced serious-minded policymaking. I dare say the year (1997) Senators Kassebaum, Nunn, Bradley, Simpson and others retired from the US Senate sort of marked the end of any genuine interest in bipartisan sensibility. The grandstanding and smug finger pointing has grown worse with each session of Congress. The federal government’s ability to respond to the pressing needs of the nation have steadily retreated despite the enormous costs of two protracted wars in the Middle East and a financial crisis that was so patently avoidable.

    Should the editor’s policy recommendations enjoy a decent measure of debate, if not a full embrace? I say “by all means” even where plenty of room remains for an adjustment of details on how mutual and divergent objectives might ultimately be reached. I view energy efficiency as the potentially largest spot to promote de facto new energy to power sustainable growth. Most analysis shows that a kilowatt conserved through efficiency is a kilowatt available to serve other productive activities contributing to wealth creation, job expansion, higher incomes and stronger household budgets to service and, hopefully, stabilize private and public debt formation.

    Despite illusions (or is that delusions?) from Washington, there is no free lunch and, yet, we continue to play the “I’ll get my slice of the Treasury” game that erodes the foundational character;; a national charcater that allowed fledgling republic of the late 18th century to build an economy that eventually became the envy of the world; a character that help equip an army and navy as an arsenal of democracy during the darkest days of the 20th century, and a government that when required to lend temporary support to millions of huddled masses yearning to be free, we undertook the challenge without endless hand-wringing or partisan bickering about the ultimate necessaity for unity of purpose.

    The issue of energy against the backdrop of environmental protection and the practical resource requirements of a steadily expanding human population pose us with arguably one of the great challenges in human history. We would do well to get serious about the proposition at hand. Listening to the sensibility of the editor–and others of similar seriousness and goodwill–is a decent place to start. Admittedly, I do have bias toward those who instinctively view life as true blessing that daily begs a measure of devotion much more than merely a mindless pursuit of self-indulgence.


  3. By OD on February 28, 2013 at 1:19 am

    Hmm, did you send a copy of your book to the president? :)

    Robert, this is slightly off topic, but you made a post about the US oil boom, mostly due to shale oil, do you have any figures on worldwide shale oil reserves? Most of the articles I have dug up confuse oil shale and shale oil and make it hard to get a good picture of the actual figures. Could we expect to see similar shale oil booms in other countries?

    • By Robert Rapier on February 28, 2013 at 2:46 am

      “Could we expect to see similar shale oil booms in other countries?”

      This is a topic I have thought about a lot, and I think the answer is yes. I think that’s why we won’t see peak oil quite as quickly as some thought we would.

      • By Adam Noel on February 28, 2013 at 4:22 pm

        In regards to peak oil there’s been a question I’ve been meaning to ask you since your predictions for 2013

        If the shale oil boom is more energy intensive (Less energy return on investment) shouldn’t that coincide with higher gas prices? I don’t think we’ll see a peak that soon either but I suspect the boom is only affordable at current gas prices and will, as a result, still keep the economy sluggish. This also creates a price floor where even if demand falls off production will fall off as it becomes uneconomical for producers.

        The other concern I have that warrants attention is what is the role of growing demand worldwide on oil prices. Couldn’t this still create a peak lite scenario? I don’t think peak oil will be a pressing concern for the near term but I still think oil demand outpacing supply is a possible issue to contend with.

        If that’s the case then we best be getting ourselves towards consuming less oil anyway!

        • By Robert Rapier on March 1, 2013 at 3:00 pm

          “If the shale oil boom is more energy intensive (Less energy return on investment) shouldn’t that coincide with higher gas prices?”

          Yes, but the way it works is that as oil/gas prices rise, more of the marginal production there makes sense. So higher prices drive higher activity. If prices slide a bit, activity will slow.

          “The other concern I have that warrants attention is what is the role of growing demand worldwide on oil prices. Couldn’t this still create a peak lite scenario?”

          That is the peak lite scenario. Growing demand means that capacity can’t outpace demand, keeping constant upward pressure on prices.

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